CNA Financial Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2014, compared with the same periods in 2013. CNA is primarily a commercial property-and-casualty insurer; Loews Corporation owned approximately 90% of its common stock. Amounts are in millions except per-share data and ratios.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $2,440 | $2,450 | $4,903 | $4,905 |
| Net earned premiums | $1,811 | $1,800 | $3,617 | $3,564 |
| Net investment income | $550 | $534 | $1,076 | $1,125 |
| Income from continuing operations | $261 | $190 | $481 | $431 |
| Net operating income | $272 | $199 | $462 | $424 |
| Net income | $267 | $194 | $280 | $444 |
| Diluted earnings per share | $0.98 | $0.72 | $1.03 | $1.64 |
- Q2 operating income growth reflected improved results in non-core businesses and a postretirement-plan curtailment benefit. Core-segment net operating income declined $22 million for the quarter and $60 million for the first half. First-half net income fell mainly because CNA recorded a $214 million after-tax impairment on the pending sale of Continental Assurance Company (CAC).
- Insurance underwriting results varied materially by segment. Combined ratios were 86.4% for CNA Specialty (90.4% in Q2 2013), 115.0% for CNA Commercial (111.7%), and 102.9% for Hardy (98.4%). A ratio below 100% indicates underwriting profit before investment income.
- First-half cash from operations was $587 million, versus $569 million in 2013; investing activities used $734 million, versus $471 million used; financing provided $163 million, versus $127 million used. Cash ended the period at $204 million.
- At June 30, total investments were $46.080 billion, total assets $59.437 billion, and stockholders’ equity $13.074 billion. Short-term debt was $549 million and long-term debt $2.558 billion, compared with $549 million and $2.011 billion at year-end 2013.
- First-half operating cash flow included ordinary business flows; financing included $546 million of debt issuance proceeds and $406 million of common dividends paid. CNA issued $550 million of 3.95% senior notes due 2024 and intended to use proceeds to retire $549 million of 5.85% notes due December 2014.
Material changes and management commentary
- Net prior-year development was unfavorable by $16 million for the first half of 2014, versus favorable development of $52 million in 2013. CNA Commercial recorded $72 million unfavorable development, largely tied to commercial auto, general liability, and workers’ compensation; CNA Specialty recorded $66 million favorable development.
- Net catastrophe losses were $130 million for the first half, compared with $104 million in 2013. Management cited higher catastrophe losses, unfavorable prior-year development, and lower investment income as pressures on core results.
- CNA Specialty’s first-half combined ratio improved to 90.3% from 92.7%; CNA Commercial’s worsened to 112.4% from 109.3%; Hardy’s improved to 94.7% from 101.6%. Commercial premiums declined amid underwriting actions and lower new business, partly offset by rate increases. Specialty premiums rose; Hardy benefited from reduced reinsurance costs.
- Net investment income declined for the first half, partly because limited-partnership income was lower, though Q2 investment income increased. At June 30, 93% of the fixed-maturity portfolio was investment grade, up from 92% at year-end 2013.
- CNA eliminated certain postretirement medical benefits in Q2, recording an $86 million pre-tax curtailment gain (approximately $56 million after tax).
Outlook, risks, and contingencies
- The filing gives no quantified earnings or revenue guidance. Management said current cash flows were expected to be sufficient for near-term working-capital and debt needs; no amounts were outstanding under its $250 million revolving credit facility.
- The sale of CAC closed August 1, 2014, after quarter-end. The first-half results include the estimated $214 million after-tax impairment. A separate coinsurance transaction on a small annuity block is expected to produce an approximately $35 million after-tax loss in Q3, according to management.
- Key risks include uncertainty in insurance-reserve estimates, reinsurance recoverability, catastrophe frequency and severity, investment-market and credit conditions, long-term-care liabilities, and regulatory limits on subsidiary dividends. Management stated that ultimate claim costs may exceed current reserve estimates.
- CNA reported a potential $72 million of future lease payments and related costs under a joint-venture guarantee, in excess of amounts recorded; management said it did not believe payment was likely. Quantifiable indemnification agreements totaled $699 million, with $7 million of related liabilities recorded; some indemnifications are uncapped.
- Routine litigation was described as not material based on currently known facts. The filing reported no material change in market-risk components during the first half.
Important facts for investors to verify
- Whether CNA Commercial’s adverse prior-year reserve development and combined ratio above 100% persist, and whether underwriting actions improve profitability.
- The adequacy of reserves, especially for long-tail claims, and the quality and collectibility of reinsurance recoverables.
- The final economics and accounting effects of the CAC sale and related coinsurance transaction, including the anticipated Q3 loss.
- Investment income trends, catastrophe exposure, and debt refinancing or repayment plans following the 2024 note issuance.
- The sustainability of non-core improvement, including the impact of the one-time postretirement curtailment gain and long-term-care experience.